The Federal Reserve faces a tough challenge: high inflation and oil prices exceeding $100. The market is betting on a 0.25% interest rate hike to 3.75-4.00%, while also watching for signals of further rate increases.
On September 15, 2026, at 8:35 AM, Reuters reported that the U.S. Federal Reserve (Fed) is likely to raise interest rates at this week's monetary policy meeting, which would be the first rate hike since Kevin Warsh took over as Fed chairman. This comes as U.S. inflation remains high, and oil prices surge above $100 per barrel, adding pressure on price trends and leading markets to believe the Fed has limited options at this meeting.
The Federal Reserve is scheduled to announce the results of its monetary policy meeting on Wednesday, following a two-day session. Financial markets are heavily anticipating a 0.25% interest rate hike, bringing the policy range to 3.75-4.00%, while also signaling possible further monetary tightening in the future.
This decision is a crucial one for Warsh, who took over as chair of the Federal Reserve's interest rate-setting committee in May. President Donald Trump chose Warsh with the clear expectation that he would lower interest rates. Raising rates before the November election, where Republicans are narrowly holding a majority in Congress, could fuel public concerns about the cost of living and benefit their Democratic opponents.
Pressure on the Fed is also increasing from the bond market, with the yield on 10-year U.S. Treasury bonds hitting 5% on Monday, reflecting expectations that oil prices will remain high and the possibility of a Fed interest rate hike. Analysts at Bank of America believe the Fed's options are clear: either raise interest rates or risk a sharp rise in bond yields.
If the Fed decides to raise interest rates, and estimates from Fed officials signal another rate hike this year as some analysts predict, Watch may need to provide more clarity on interest rate trends and the economic outlook, even though he has previously avoided giving forward guidance on the direction of interest rates.
Expectations for interest rate hikes have shifted rapidly in recent days, with a recent Reuters poll finding that economists expect the Fed to raise rates on Wednesday, a departure from a week ago when most economists held the opposite view.
Previously, Federal Reserve Governor Christopher Waller had called for allowing the inflationary curbing process to continue, after June and July inflation figures cooled and appeared to be moving towards the Fed's 2% target. Meanwhile, New York Fed President John Williams stated earlier this month that the Fed should wait and see how the situation develops.
However, stronger-than-expected inflation data last week changed that picture, with some Fed officials already leaning towards raising interest rates, including Cleveland Fed President Beth Hammack, Dallas Fed President Lori Logan, and Minneapolis Fed President Neel Kashkari, who believe the Fed should have raised rates in July and disagreed with the decision to keep rates unchanged at that time.
The latest data indicates that the U.S. core consumer price index, which excludes food and energy prices, rose 0.3% in August from the previous month, remaining above the level consistent with the Fed's 2% inflation target. Meanwhile, oil prices soaring above $100 per barrel due to renewed conflict in the Middle East further diminishes confidence that core inflation is slowing back towards the target clearly and quickly enough.
Michael Feroli, an economist at JPMorgan, expects the Fed to raise interest rates on Wednesday, although he sees the decision as closer to a possibility than the approximately 90% probability reflected in futures markets. He reasoned that following Watch's consistently strong warnings about its intolerance of inflation, inaction by the Fed could damage its credibility.
Derek Holt, an economist at Scotiabank, believes that raising interest rates at this time is not the right option, but expects the Fed to do so anyway, given Watch's past stance and its strong emphasis on signals from financial markets.
While economists believe Watch still has the ability to persuade most Fed members to support keeping interest rates unchanged, considering his stance that controlling inflation is the Fed's responsibility, coupled with higher-than-expected August inflation figures and signals from Trump that the war in Iran could continue for several more months, potentially keeping oil prices high, Watch may not want to choose to maintain interest rates.
Gregory Dago, an economist at EY-Parthenon, predicts that Waller and Williams may support raising interest rates because the pace of inflation slowdown is still unsatisfactory. And if only one or two committee members support keeping rates unchanged, Watch is likely to rely on a majority of the committee and vote in favor of raising rates as well.
Reference: reuters.com
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